City or country property, which is a better investment?

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According to Australian Bureau of Statistics’ data, almost two-thirds of us live in cities. But while many of us live in a metropolis, there are plenty of great opportunities to buy investment property in regional areas.

City versus country: pros and cons

Wherever you choose to buy a property, it’s important to understand the pros and cons of investing in the neighbourhood you’re considering.

Large cities have better employment prospects than country areas, which is important for people paying down a mortgage.

“If you look at population trends over the last 25 years, there has been a move away from regional areas to capital cities. Cities generally have more diversified economies. Economies in regional areas can be reliant on just a handful of industries,” says Cameron Kusher, head of research for Australia at CoreLogic RP Data.

However, city properties are more expensive than those in regional towns. So you will usually pay more to buy property in a metropolitan area.

But, says Kusher, capital cities don’t tend to perform in line with each other. For instance, the Hobart market has only recently started to appreciate after 10 stagnant years, while house prices are falling in Perth and Darwin.

“Rental returns are also extremely low in capital cities, so a lot of people buying property for investment purposes in a capital city are banking on the capital growth,” he adds.

On the flip side, while capital growth may be slower, rental returns can be higher in regional areas, allowing you to pay the mortgage down quicker and be more likely to have a “positively” geared investment.

The other downside of purchasing city property is intense competition which is pushing house prices up.

Kutcher says, “Lower demand in regional markets means buyers probably have a better chance of getting a good price because there’s not so much competition.”

Regional options

Nevertheless, finding good properties in regional centres is still challenging. The idea is to look for areas that are not reliant on a single industry.

“You tend to find areas closer to the capital cities perform better than those away from major centres. So in Queensland, markets like Toowoomba and the Sunshine Coast are worth looking at. Near Sydney you might look at places like Wollongong and Newcastle. For Melbourne it’s Bendigo, Ballarat and Geelong,” says Kusher.

Coastal towns are another option for people who want to buy property, but don’t want to pay city prices.

“Coastal markets in places like the Richmond-Tweed (Northern Rivers) area of New South Wales are worth considering. Growth has picked up in those markets, and I think we’ll see more of that this year,” Kusher says.

Capital city considerations

If you are set on buying a property in Sydney or Melbourne, he says despite skyrocketing prices recently, there’s room for further price appreciation.

“We are still going to see growth over the next 12 months in Sydney and Melbourne. It’s likely to be reasonably good growth, but not as strong as we’ve seen over the last couple of years,” he adds.

Tighter lending restrictions recently introduced by regulators should dampen some growth in these markets. But low interest rates and population growth combined with lack of supply is likely to continue to support the market.

“Brisbane will be an interesting one to watch. It hasn’t seen a lot growth over the last few years. But more migrants moving into Queensland could trigger a bit more action, particularly in the south-east corner, including Brisbane. The employment market is the big challenge in Brisbane, which is nowhere near as strong as Sydney and Melbourne,” Kusher notes.

Perth, however, is a more difficult market. “Residents are leaving Western Australia. So there’s lower housing demand and more people are looking to sell, which is creating downward pressure on prices. Later this year you might see stability coming back into the Perth market. But I think we’re a way away from the market starting to rise again,” he adds.

The message is: Do your homework and look for areas where there’s a thriving economy and good infrastructure.

More importantly, talk to your Smartline broker before you start looking to get a feel for the market and an idea of how much you can borrow.